Several months ago, I wrote a rather wonky post explaining that the western world became rich in large part because of jurisdictional competition. Citing historians, philosophers, economists, and other great thinkers, I explained that the rivalry made possible by decentralization and diversity played a big role in both economic and political liberalization.

Now I want to provide another argument in favor of the jurisdictional differences that are encouraged by national sovereignty. Simply stated, it’s the idea of diversification. Reduce risk by making sure one or two mistakes won’t cause a catastrophe.

This isn’t my insight. The author of The Black Swan understands that this simple principle of financial investment also applies to government. He recently explained his thinking in a short interview with Foreign Policy. The magazine began with a few sentences of introduction.

Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

But it’s important to understand why he likes Switzerland and dislikes the European Union: Small is beautiful. More specifically, decentralized decision making means less systemic risk.

We need smaller, more decentralized government. On paper, it might appear much more efficient to be large — to have economies of scale. But in reality, it’s much more efficient to be small. …an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it’ll be fine. Size makes you fragile.

Taleb elaborates on this theme, echoing many of the thinkers I cited in my wonky September post.

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

Because it’s a short article, he doesn’t cite many specific examples, so let me elaborate. One of the reasons for the financial crisis is that the world’s financial regulators thought it would be a good idea if everybody agreed to abide the same rules for weighing risks. This resulted in the Basel rules that tilted the playing field in favor of mortgage-backed securities, thus helping to create and pump up the housing bubble. And we know how that turned out.

Unfortunately, governments seem drawn to harmonization like moths to a flame. To make matters worse, the corporate community often has the same instinct. Their motive often is somewhat benign. They like the idea of one rulebook rather than having to comply with different policies in every nations.

But mistakes made for benign reasons can be just as bad as mistakes made for malignant reasons.

P.S. Last but not least, it’s worth noting that Taleb is not a big fan of democracy.

I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader

4 Responses

I’m happy to see someone more famous, present the same point of view as the discountable little commenters like Zorba etc. keep repeating.

And by virtue if its practical value, this post would be one of my contenders for top Dan Mitchell post of the year. This is because, if people simply valued true federalism and decentralization in general, the rest would automatically take its course in promoting the most successfully societal models. But as it is, we will have to wait until the countries that follow the delusion of prosperity through mandatory homogenization and harmonization decline so much that the benefits of pieces breaking away become so high that the ensuing conflict becomes worth the prize of independence. Then we will see the successful societies that will be the new beacons of freedom in the twenty first century world, to replace the United States which now seem finally caught in the same European trajectory vortex of ever more mandatory collectivism.

Because politicians backed by majorities will fight the independence movements tooth and nail. Independence would break the politician cartels and introduce more competition in politics. Politicians will fight it tooth and nail. Look at how they hang on tooth and nail to the European sinking ship. Does any European really think that somehow Europe can up-ramp to a five percent annual growth trendline, the only way that will enable Europeans to stave of now precipitous decline and maintain their much above world average standard of living? Only useful idiots fail to see how deeply entrenched European decline is, especially under the current centralized Brussels plan.

The rising third world tide will sink all western boats. That is because the western world is reacting to the competitive challenge by suppressing desire and motivation to be exceptional on the western boats. As exceptional sailors are required to work for the rest, so that the rest can be insulated from the consequences of mediocrity and keep enjoying their comparatively posh lives on the western cruise ships. It won’t work and will only cement the destiny of decline.

P.S. One little important detail. Perhaps someone can express it more eloquently than an anonymous blogger whose native language is not even English: The important part of federalism is independence to raise revenue. There is a lot of talk about federalism in Europe, but that often translates to centralized revenue raising and local freedom in spending. That combination is the worst, leading to the most corruption and cronyism, as local politicians and the local population allocate their ration of the centralized revenue based on political criteria. Federalism is needed much more as freedom to raise the revenue , freedom to spend it is less critical. Only then will the more optimal compromise to pay for what you spend be made.

PPS: Finally, I’ll diverge and support democracy. That being said, only few democracies will make the right choices and prosper in the Darwinian natural cultural selection. One of my greatest fears is that democracies of the fifty one percent will make bad chooses in such a systemic and ubiquitous fashion that authoritarian regimes start making better choices. That would be a tragic outcome, but Darwinian advancement of the fastest growing will proceed regardless of what western world voter lemmings want.